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Monday, September 10, 2012

Good Luck to Restaurant Workers Seeking to Retire!

So it starts.  401(k) plans are now required to spell out fees.  No one said they were required to make understanding them clear.  It interests me that you can open a brokerage account, buy funds and easily understand, even if you are not an investment professional, all the costs involved, including commissions and fund costs; but with a 401(k), participants could have PhDs in math and still be bewildered when it comes to the costs.  Of course there is a reason for this.  Clearly, big 401(k) providers are out to take advantage of financially illiterate plan administrators and participants.  It is part of the Wall Street ethos.

I have in my hands the "Hospitality Industry 401(k) Plan ERISA 404 Retirement Plan and Investment Information" document.

Source: Advisorone
It says, "The attached notice is intended to assist you in making informed decisions with regard to the management of your individual account providing you with information about the Plan, including fees and expenses regarding the Plan's designated investment alternatives."

The notice was prepared by the Principal Financial Group.

When I get a document like this, I take a deep breath and try to imagine an employee reading it.  I have made a number of investment presentations and conducted financial education classes.  I know firsthand how fast eyes glaze over and people become stupified when confronted with financial documents.

Some people say fine - maybe the administrators will boil down the information.  Not necessarily so - administrators in some instances don't understand the cost of the plans or want to advertise that they have chosen plans that are costly.

With that said, let us think of the line cook, bar person, or waitress reading this document and trying to do the right thing in creating a nest egg for retirement.  It would be like a mutual fund manager trying to decipher a recipe for a fancy French entree.

The document says "An annual Plan administrative expense of 0.83 percent applies to each participant's account balance."  In addition, there are some nickel and dime expenses - for example, $35 "withdrawal service fee."

The real eye opener, and what participants need to pay attention to, is the investment management expenses.

For the Fixed Income Fund choices, the annual expenses range from .73 -.78%.
For the Balanced/Asset Allocation Fund choices ,the annual expenses range from .90 - .95%.
For Large Equity Fund choices, the annual expenses range from .31 (index fund) to 1.09%.
For International Equity Fund choices, the annual expenses range from 1.14% to 1.46%.

And so it goes with the other choices.

A non-investment person wouldn't see these fees as egregious.  But they do a lot of damage.

How much damage?  Suppose you have $10,000 in the MidCap Growth III Separate Account, one of the choices offered restaurant workers, sub-managed by Turner/Jacobs Levy.  The document informs us the fee is 1.10%.   Its return over the 10 years ended 6/30/2012 was 7.49% annualized versus 8.47% on the Russell Midcap Growth Index it reports as the benchmark.  Over 30 years, the investment would grow to $87,305. I f you got the index return, the $10,000 investment would be $114,627--31% higher!

Here's the kicker - it is very easy today with low-cost index ETFs to get within .15% of an index's return.  The bottom line is that seemingly small differences in fees have a huge impact over the longer run.  And, though progress has been made with the new law requiring reporting of fees, there is still a need to spell out their impact explicitly.


  1. I recently heard that 10% of all the jobs are in the food service industry. Thats amazing. I also heard that 42% of all the news jobs being created are considered low wage.

  2. Bob,

    I've reviewed a lot of portfolios. Whenever I see a financial product from an insurance firm, I don't expect good things.

    There are cheap and fiduciary alternative to these insurance company sold 401k plans, my experience is that most plan sponsors don't care enough to research and most plan participants are too illiterate to know the difference.

    Also check out my post: small biz 401k, big plan fees

    1. Michael,
      The post you mention should be read by the administrators of all small business plans. Minimizing 401(k) costs is one of the most valuable steps they can take for their employees' future.